Last Thursday evening, more than 100 research professionals braved the torrential rain to attend a panel discussion co-sponsored by ANALEC and Integrity Research Associates titled Investment Research: The Next Big Thing. Research industry experts including Gene Ekster, Gabe Lowy, Divya Narendra, and Indy Sarker contributed to the panel, which Mike Mayhew moderated.
The purpose of the panel discussion was to help investment professionals think through where the research industry is heading given current pressures from regulatory developments, technology innovation, competition, and changing client demands.
However, based on the expertise of the panel, questions from the moderator, and the interests of the audience the panel focused on a few topics, including the impact that changing buy-side demand would have on the sell-side research product, key trends in the use of alternative data and data analytics by the sell-side and buy-side, and advice the panelists had for analysts who are in the early stages of their careers.
Changing Buy-Side Demand
One of the questions posed to the panel addressed the buy-side’s changing demands for the equity research they consume and how this might alter what the sell-side needs to provide them. The panelists highlighted the following areas of interest.
- Alternative data – One panelist noted that buy-side analysts and PMs have expressed a growing interest in research driven by unique non-traditional data. He explained that investment professionals are increasingly looking for insights that can be backed up quantitatively through the use of alternative data sets including web scraped traffic data, credit card transaction data, point of sales data, or even data collected from satellite imagery. This panelist concluded that a growing number of sell-side firms will need to add alternative data and the ability to work with it to their research teams in the future.
- Not looking for maintenance research coverage – Another panelist explained that the buy-side doesn’t value maintenance research, nor are they looking for duplicate coverage on the same large cap and mid cap names that all the large investment banks are producing. He concluded that to provide value-added research, the sell-side needs to provide research on less covered stocks, including small cap or even private companies.
- Non-consensus ideas / short ideas – Another panelist explained that the research most highly read by buy-side analysts included short ideas and research presenting a nonconsensus view on a stock. He acknowledged that the sell-side tends not to produce this type of research today, and that he expects some sell-side firms will try to create more of this type of research in order to get paid by the buy-side in the future.
- Help buy-side understand where their returns are coming from – Our final panelist argued that most buy-side firms do not understand what aspect of the research and data they consume drives their performance. Consequently, he contends that in the future, the sell-side will provide advice to the buy-side helping them to identify the source of their returns and enabling them to support a quantitative research process which can support healthy returns. Ultimately, he sees the sell-side providing more customized advisory services and less published research.
Advice for Young Analysts
Another question posed to the last week’s panel of research industry experts was what advice would you give to an aspiring analyst to help them develop a successful career? The following was what the panelists suggested.
- Acquire data analytics / statistics experience: Two panelists recommended that young analysts try to obtain data analytics and/or statistics experience. They both admitted that very few traditional sell-side or buy-side analysts have this type of experience today, but that this will be an increasingly more important skillset in the future. Consequently, these panelists felt that analysts that have both traditional investment research skills PLUS data analytics experience will be extremely valuable in the future.
- Build your brand: Another panelist explained that in the future investment analysts need to proactively try to build his or her brands and reputations by leveraging social media. This might include publishing research on platforms like Seeking Alpha or SumZero, or leveraging other platforms like Estimize to develop a track record. The ultimate purpose of posting research or tracking your estimates on these platforms is to build your brand and make yourself more credible to potential employers.
- Read 2 books: The final panelist recommended that aspiring young analysts try to enhance their investment research educations by reading two classic books. The first book is The Intelligent Investor, The Definitive Book On Value Investing. Originally written in 1949 by famed value investor Benjamin Graham, revised editions were published in 2003 and 2009 by Jason Zweig and Warren Buffet. The second recommended book is Data Just Right: Introduction to Large-Scale Data & Analytics by Michael Manoochehri.
While last week’s panel on the future of the investment research industry could not cover all the important topics that industry professionals wanted addressed, it clearly struck a nerve with the audience as most stayed for the entire two hour event, despite the bad weather.
The panelists all agreed that fundamental research and the traditional equity research analyst was not going away anytime soon – particularly sell-side or buy-side analysts who could provide deep industry expertise and a rigorous and objective research process to their work. However, the panel did agree that the future of the research industry was likely to be quite different from the past due to the explosion in the availability of alternative data; the growing sophistication of analytic tools; and an overhaul to the commercial model for research. These trends would alter the sell-side research product and change the skill sets most valued by research analysts in the future.